What is RSI?
The Relative Strength Index (RSI) is a momentum oscillator developed by J. Welles Wilder Jr. in 1978. It compares the magnitude of recent gains to recent losses to determine if a security is overbought or oversold. RSI oscillates between 0 and 100, providing clear signals about potential reversal points.
Unlike its name suggests, RSI doesn't compare the relative strength between securities, but rather measures the internal strength of a single security by analyzing the relationship between its up and down closes over a specified period, typically 14 days.
RSI Interpretation & Signals
Overbought & Oversold Levels
Overbought (70+)
- • Signal: Potential selling opportunity
- • Meaning: Recent gains dominate
- • Action: Consider profit taking
- • Caution: Can stay overbought in trends
Neutral (30-70)
- • Signal: Balanced momentum
- • Meaning: No extreme conditions
- • Action: Follow trend direction
- • Strategy: Use other indicators
Oversold (30-)
- • Signal: Potential buying opportunity
- • Meaning: Recent losses dominate
- • Action: Consider accumulation
- • Caution: Can stay oversold in downtrends
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RSI Trading Strategies
Basic RSI Signals
Buy Signals
- • RSI crosses above 30 (oversold exit)
- • RSI crosses above 50 (momentum shift)
- • Bullish divergence formation
- • Support bounce confirmation
Sell Signals
- • RSI crosses below 70 (overbought exit)
- • RSI crosses below 50 (momentum shift)
- • Bearish divergence formation
- • Resistance rejection confirmation
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Advantages vs. Disadvantages
Advantages
Clear Scale
0-100 range provides objective readings
Momentum Insights
Measures internal strength and weakness
Divergence Detection
Early warning of potential reversals
Versatility
Works across all timeframes and markets
Disadvantages
False Signals
Can generate whipsaws in choppy markets
Lagging Indicator
Based on past price data
Extended Extremes
Can stay overbought/oversold in trends
Context Dependency
Requires market condition awareness
Key Takeaways
Momentum Measurement: RSI quantifies the speed and magnitude of price changes to identify overbought and oversold conditions.
Context Matters: RSI signals are most effective when considered within the broader market trend and conditions.
Divergence Power: RSI divergences often provide early warning signals before price reversals occur.
Confirmation Essential: Combine RSI with other indicators and price action for higher probability trades.
Related Trading Concepts
MACD
Moving average convergence divergence indicator for trend and momentum analysis.
Stochastic
Momentum oscillator comparing closing price to price range over time.
Divergence
When price and indicators move in opposite directions, signaling potential reversals.
Momentum Trading
Trading strategy based on the strength of price movements and trends.
Overbought/Oversold
Market conditions where prices may have moved too far too fast.
Oscillators
Technical indicators that fluctuate within bounded ranges to signal conditions.
Trading Risk Disclaimer
RSI and technical analysis involve substantial risk and are not suitable for all investors. Past performance of technical indicators does not guarantee future results. RSI signals can produce false readings and should not be used as the sole basis for trading decisions. Markets can remain overbought or oversold longer than expected, leading to significant losses. Always use proper risk management, including stop losses, and never risk more than you can afford to lose. Consider consulting with qualified financial professionals before making trading decisions based on technical indicators.